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Despite lower-than-expected net interest income, HDFC Bank Ltd. reported better-than expected Q1 FY24 profit after tax at Rs 119.5 billion (9% beat) led by strong other income and lower credit costs.
The mega merger with Housing Development Finance Corporation Ltd. has been effective from July 1, 2023 and the bank has shared proforma loans and deposits figures.
While headline loan growth for the merged entity stands at 13% YoY, the bank sounded confident of improving the same to ~17% YoY for FY24 as drag from nonindividual book of HDFC recedes.
The merged entity’s loan-to-deposit ratio stands at 109% and the bank would endeavour to bring it to standalone bank’s level (84- 85%) in three-four years. This would necessitate strong deposit growth, for which HDFC Bank is banking on expanding distribution (aims to double branches over FY22-25) and deepening engagement with customer while keeping deposit pricing competitive.
As we have limited merged entity financials, we value the stock on standalone basis.
Our target price is unchanged at Rs 2,000, valuing core banking business at ~3.4 times FY25E adjusted book value. Maintain ‘Buy’.
Key risks: Slower-than-expected growth in retail deposits and higher-than-expected opex.
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